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Buyer's Market in Export Trade Credit Insurance

In the recession, some insurers canceled the limits of financial protection for export trade credit insurance. Now several are offering policies with non-cancelable limits.

Export trade credit insurance can be a company’s smartest buy—a product that absorbs the cost of deadbeat debtors. The insurance covers credit risks caused by the default, bankruptcy or insolvency of a buyer’s customers, up to a stated financial limit. All well and good, except when the insurer midway through the policy period cancels the limits of financial protection.

This was the unfortunate situation many policyholders fell into following the financial crisis that reared in 2008. Not that the insurers did anything wrong since the policy contract wording clearly stated that they could cancel the financial limits with a 24-hour notice. The reason for the cancellation is the insurer’s sense that a customer’s buyer is suddenly an excessively high credit exposure. The policyholder must now bear this risk on its own balance sheet.

No figures exist on how many policyholders received such luckless news, but it was likely more than a few, given the deep recession that ensued. The limit cancellations resulted in what Scott Ettien, senior vice president, trade credit and political risk, at insurance broker Willis calls a “black eye” for the insurers providing the cancelable limit coverage, despite the legality of their decisions. Combined with higher prices for the insurance, insurance premium volume fell precipitously.

Now it’s a different story, however. Perceiving a market opportunity, more than a dozen insurance carriers have entered the export trade credit business with a new non-cancellable limit policy. And the three insurers providing the cancelable product—Euler Hermes, Atradius and Coface—have added a non-cancelable financial limit solution to their lineup, as well.

This enhanced competition and liberalized coverage have culminated in a buyer’s market, according to Ettien, who formerly worked at Atradius. “It is a very soft market right now, with many new insurer entrants,” he adds. “Policies can be customized to buyer needs. Consequently, we’re seeing much higher volumes of business.”

With regard to this, Baltimore-based Euler Hermes, part of the giant German insurer Allianz Corporation, recently unveiled a way for its insureds to increase limits beyond their existing policies. “Say we provided $2 million in limits to a customer, which is a perfectly fine limit during most of the year,” said Jochen Duemler, Euler Hermes, CEO for the Americas.

“During the holiday season, however, this customer’s business peaks to $3.6 million, requiring higher limits for just this period. To save on the premium, the customer doesn’t want $3.6 million in limits for the full year. But, it definitely needs more coverage at Christmastime. We are now able to write a second policy to absorb the additional $1.6 million in credit risk during the three-month period.” The product is called CAP.

Euler Hermes also has put on the shelf an excess of loss policy for insureds wanting to retain a significant portion of first dollar credit losses internally. The insurance would attach at $1 million in aggregated losses or higher, and is tailored to the policyholder’s needs.

These policy enhancements and additional innovations—several insurance carriers will blend export credit risks with political risks in a single policy—are enticing buyers back to the market. Insurance broker, Marsh reports that premium volume has risen steadily over the last few years, was up 7 percent in 2012, and is currently in excess of $9 billion worldwide.

Marketing must also take a bow for the increase. “Other than the changes in the policy itself, insurers have made considerable investments in people on the street to promote the product,” said Jim Baumgartner, senior vice president in Marsh’s trade credit practice. “We also have people dedicated to companies with a global footprint needing coverage. There is definitely more excitement about export trade credit than there has been for some time.”

Difference in a Decade A decade ago, there was excitement, too. At the time, another soft market prevailed, but buyers tended to be European companies. US concerns were focused domestically on sales, and had little concern over the financial viability of customers. Currently U.S. companies are nearly as apt as their European counterparts to consider the insurance, given their wider presence overseas.

Interestingly, for many companies, the cancellable product still makes sense. “The companies turning to the big three insurers are essentially smaller concerns that have limited credit risk expertise in-house,” Ettien said. “Carriers like Atradia, Coface and Euler Hermes have dedicated information-gathering teams that dig into the credit-worthiness of policyholders’ customers.”

This information cuts both ways. It assists the carriers to halt limits when it appears a debtor company is in financial straits, and it helps insureds understand which prospective customers might be less likely to pay, based on the carrier information.

“For really large customers with sophisticated credit departments and dozens of credit managers, the non-cancellable insurance makes more sense,” Ettien said. “The deductibles are much higher (than cancellable policies), which keeps the insured’s skin in the game and everyone honest. The carrier trusts that the insured has the sophistication to know its customers’ financial stability.” Not that the non-cancellable limits are exactly that. “Insurers can still cancel the limits, but with far more reasonable notice—at least 30 days and in some cases 60 and even 90 days,” said Ettien. “There’s wiggle room.”

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